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Why Silver Prices Will Keep Rising in 2016
Silver prices have seen a massive rally this year, outperforming both the broader markets and gold prices.
The price of silver climbed 27% through the first four months of 2016. That not only beat gold prices by 7%, but it also smashed the Dow Jones Industrial Average and S&P 500 by 24.4% and 25.4%, respectively.
And there are six factors that will keep the silver price rally going in 2016.
But first, here's how much prices have recovered from one of the longest bear markets for silver in the last 30 years…
As this chart shows, silver prices are coming out of one of the longest bear markets in history. After peaking at $51.33 in April 2011, the price of silver fell a whopping 73.2% to $13.76 by Dec. 14, 2015.
But that was nothing compared to the other crashes we've seen in recent decades…
In fact, the worst crash ever occurred on March 27, 1980. That was when the silver price collapsed 64% in just one session. It's known as "Silver Tuesday" because it marked the biggest one-day drop in history.
"Silver Tuesday" was caused by Nelson and William Hunt. The two brothers attempted to control the silver market by using loaned money to purchase both physical silver and futures contracts. After defaulting on their loans, the Hunts crashed the entire silver market, leading to a silver bear market over the next 13 years.
Fortunately, silver prices started to recover earlier this year when the broader market took a turn for the worse…
Earlier this year, fears of a slowing global economy and reduced Chinese demand for commodities sent global markets into a massive selloff. During the first two months of the year, the Dow Jones Industrial Average and S&P 500 tumbled 6.2% and 6.4%, respectively.
But silver's attractiveness as a safe-haven when the markets are rough offered a boost to silver prices. Futures saw a 7.8% rebound over the same period.
And Money Morning Resource Specialist Peter Krauth – a precious metals specialist with more than 20 years of trading experience – says this year's silver price rally is far from over.
Here are the six reasons why the white metal will keep posting gains in 2016…
Silver's use in solar energy technology is quickly growing. That's because silver plays a key role in photovoltaic (PV) cells.
You see, PV cells are used in solar panels to conduct light into energy. When sunlight contacts the silicon cells found in silver, the reaction creates electricity. Silver's conductive qualities also enhance the sunlight, which can improve the collected energy's quality.
That means silver demand will surge alongside solar demand this year. According to renewable energy research site CleanTechnica, roughly 16 gigawatts (GW) worth of solar panels are expected to be installed by the end of 2016. That marks an incredible 119% increase from the amount of 2015 installations.
With the Silver Institute projecting 70 million ounces of silver to be used for solar energy in 2016, silver prices will be the first to benefit from the exploding solar market.
"Solar power is rapidly growing," Krauth said. "With solar panels containing an average of 15 to 20 grams of silver each, this industry will have a marked impact on demand, which will translate into higher silver prices."
Demand for silver bullion has skyrocketed in recent years, and that growth is expected to continue in 2016.
You see, sales of the 1 oz. American Silver Eagle coin – the official silver coin of the United States – have soared 370% since 2007. According to the U.S. Mint – the government agency that controls coin circulation – Silver Eagle sales hit a record 47 million units in 2015.
What's even more bullish for silver prices is bullion demand in 2016 is already on track to outpace last year. As of May 3, roughly 19.6 million Silver Eagle coins have been sold so far this year.
According to Krauth, the U.S. Mint is on track to sell upwards of 60 million Silver Eagle coins this year. That would make 2016 the highest-selling year for coins in the Mint's history.
And consumer demand for coins isn't just growing in the United States. For example, Australian silver sales hit 4.28 million ounces in the first quarter. That marked a whopping 165% increase from Q1 2015, according to Australia's Perth Mint.
"Bullish sentiment for physical silver remains strong, as witnessed by bar and Silver Eagle sales," Krauth noted. "People just can't get enough."
The Federal Reserve's hesitancy to raise interest rates will be another boon for the price of silver.
Commodities that are priced in U.S. Dollars benefit from low interest rates. That's because higher rates boost the value of the dollar, making dollar-denominated metals like silver more expensive. This makes silver bullion less affordable to users of other currencies, which reduces demand and lowers silver prices.
At the rate the Fed is moving, it looks like the price of silver can look forward to lower interest rates for longer. During the three FOMC meetings so far this year, Fed Chairwoman Janet Yellen left rates unchanged due to slowing economic growth. The Fed's April decision to keep rates at their current level gave silver prices a gain of more than 5% in the following week. In fact, the metal hit a one-year high of $17.82 on April 29.
Forecasts for the rest of this year's FOMC meetings are also dovish. On April 27, Bloomberg reported the odds of an interest rate hike in June stands at 19.6%. The odds are just slightly higher for the meeting in August.
Movement in the gold/silver ratio will keep attracting investors to the silver market this year.
You see, the gold/silver ratio is one of the most important metrics used in the metals market. It's used to calculate the relative values of gold and silver to each other. To find the ratio, you divide the current gold price per ounce by the current silver price per ounce.
The ratio hit record highs last quarter, which was bad news for silver prices. It hit a peak of 83 during the second week of March, meaning 83 oz. of silver was required to buy one ounce of gold. That extreme ratio – which has only been reached three other times since 1996 – pulled the silver price slightly lower.
But the ratio is finally giving us a correction to profit from…
"When the ratio reaches a multiyear extreme, it means there's a massive opportunity to make money," Krauth said. "Luckily, that's what's happening right now."
Since the early-March peak of 83, the gold/silver ratio has plunged to its current 73-74 range. Over that same period, the silver price has surged nearly 13%.
And Krauth sees the gold/silver ratio falling much lower in 2016. In fact, he predicts it will return to the 55 level last seen before the financial crisis.
A lower gold/silver ratio will be one of the best indicators of silver's continued rally this year.
Demand for physical silver will rise in 2016 thanks to its "safe haven" appeal.
A safe-haven investment is one whose value either increases or remains the same during periods of market volatility. Investors and traders keep safe havens in their portfolios as insurance against unforeseen drops in the Dow Jones Industrial Average or S&P 500.
For example, silver prices came out of their five-year slump in January and February when the broader markets went into a free fall. During the first two months of 2016, the Dow Jones and S&P 500 plunged 6.2% and 6.4%, respectively. Silver's attractiveness as a safe-haven when the indexes were volatile pushed the silver price up 7.8% over the same period.
These attractive hedging qualities of physical silver make it a great long-term investment. It's a safety net that will always come in handy.
"I own physical silver," Money Morning Tech Specialist Michael A. Robinson noted. "I won't sell my physical silver because it's in my portfolio for a reason. Just like I insure my car, I insure my portfolio in case disaster hits."
Silver jewelry sales are growing fast, and that's bullish news for silver prices.
According to the Silver Institute, sales of silver jewelry in the U.S. increased in 2015 for the seventh straight year. Roughly 60% of jewelry retailers saw an average 15% increase in sales. Not to mention nearly 50% of all U.S. retailers said their silver-based items had the highest turnover rate in 2015.
"These retailers are confident the sales growth will continue," Krauth said. "About 87% of U.S. retailers are optimistic that strong silver-jewelry sales will persist."
This confidence caused over 50% of surveyed retailers to increase their supply of silver jewelry by an average of 21%. That high supply and high demand will be a big boon for the long-term price of silver.
And here's how you can make money from our 2016 silver price target…
We see silver prices topping $22.35 this year – a 25.4% gain from their recent high of $17.82.
But that's our conservative projection. If gold prices rise above their current $1,289 level – which Krauth expects to happen – then silver prices will see even bigger gains in 2016 thanks to the lower gold/silver ratio.
The best way to bank profits from the silver price rebound is silver ETFs, which are on a hot streak recently. In fact, Commerzbank reported that current holdings of silver ETFs are at their highest level since late 2014.
That's why we've picked the two best funds to invest in this year…
The first silver investment we recommend is the Sprott Physical Silver Trust ETV (NYSE Arca: PSLV).
This trust holds bullion coins and bars at a safe third-party location in Canada that's subject to audits and inspections. PSLV boasts a $942 million market cap and is on its way to reaching $1 billion.
One of the best aspects of PSLV is its exchange-traded vehicle (ETV) status. An ETV exposes investors to commodities like silver without having to physically own them. This lets investors avoid the expensive inconvenience of properly storing physical silver.
But PSLV's best incentive for American investors is the tax benefits. The ETV offers a capital gains tax of only 15% to investors who own it for at least one year. That compares to the 28% tax associated with the majority of silver and gold funds.
As of May 3, PSLV is up 26.4% so far this year. That beats the Dow Jones Industrial Average's gains of 1.9% over the same period.
The second silver fund to consider is the ProShares Ultra Silver ETF (NYSE Arca: AGQ).
With a current price of about $41, AGQ is one of the more expensive silver funds out there. That's because investors pour into it for one reason – it gives you double the daily gains that just holding physical silver can give you.
But Krauth says this fund is for investors with more risk tolerance.
"You don't want to bet your retirement on this fund," Krauth explained. "This ETF also moves down by twice as much as the price of silver does each day, so you also risk facing twice the daily losses."
It's important to be diligent with this kind of fund. Krauth recommends checking your position every day and setting a trailing stop at $26.67. That's the bottom AGQ hit on Dec. 17, 2015.
Although silver prices are typically more volatile than gold prices, silver is expected to far outpace gold in 2016. After all, silver prices are already up 27.5% so far this year, while gold prices have only gained 22.1%.
"I'm betting that sentiment is about to turn in silver's favor, perhaps dramatically so," Krauth said. "Just don't expect it to remain this cheap for long."
There are several factors that can drag silver prices lower. Two of the biggest influences are interest rates and stock market performance. When interest rates rise, silver prices usually fall because higher interest rates increase the value of the U.S. dollar. A valuable dollar makes commodities like silver that are priced in dollars more expensive to anyone buying it with another currency.
Similarly, a stock market rally usually pulls silver prices down because investors like to buy silver as a hedge against market volatility. When stocks rise, investors spend more money on these more liquid assets than silver.
Conversely, low interest rates and declining stocks push silver prices higher due to the metal's appeal as a safe haven for your money. Metals like silver are considered safe havens because they're physical assets. Silver prices will either move sideways or increase when the stock market dramatically dips. These hedging qualities are why we suggest having about 5% of your portfolio in gold or silver.
According to Money Morning Global Resource Specialist Peter Krauth, silver prices are headed to $22 an ounce by the end of 2016. That would be a 10% increase from silver's closing price of $19.99 on July 27. Krauth identified five catalysts that will push the silver price toward that target by the end of 2016.
Here's a complete breakdown of our silver price prediction – plus two silver exchange-traded funds that have gained more than 40% this year…